Insights from 2023, Predictions for Mortgages in 2024

The new year brings resolutions, fresh perspectives and the chance to reflect on the preceding 12 months. It feels like only yesterday we spoke to Keith Church,   the Head of Economic Modelling at 4most analytics consulting, about his thoughts for 2023. At the time, his insights spoke of managing expectations about the economy, a continued downward trend for UK house prices, and continued affordability hurdles for first-time buyers. A lot of these factors are still pressing for 2024, as Keith gives a fresh perspective on his opinions, based on how 2023 unfolded. 

We've avoided recession, giving some hope for 2024

One of the primary concerns for the UK economy in 2023 was the prospect of recession, but this has been avoided. One key reason identified by Keith is the strong growth of wages over the year.

"At the start of 2023 there was talk about the biggest two-year fall in real incomes on record. Fortunately, this was completely wide of the mark. Add in the buffer of savings accumulated during the pandemic and the economy managed to muddle through."

In his view there is good reason that we should be cautiously optimistic about 2024. "Inflation could even be back at 2% in April, and interest rates should start to come down from May." But we can't forget that there are hurdles in the way; "Many more of those with mortgages will see big rises in their payments this year, and the situation in the Middle East is already straining supply chains. But most economic forecasts of scant growth and rising unemployment look too gloomy."

House prices will continue to decrease

UK house prices dropped by 4% over the course of the previous year, in Keith's view, this trend could continue given the ongoing strains around affordability.

"Even with mortgage rates at 4/5%, arguably affordability at current prices still looks stretched. That would suggest prices could continue to drift down. But a scenario where affordability is restored as incomes rise is equally likely. This out come would mean activity remains subdued."

Analysis from the UK government has found that high interest rates have led to higher borrowing costs for households, notably mortgage interest rates which rose sharply from the very low rates seen previously. This will affect people calculating their ability to get on the property ladder along with homeowners who are already making mortgage payments.

Squeezed BTL landlords could supply FTBs

Keith has a view on what the big stories will be for brokers this year across areas like Buy to Let.

"The economics of Buy-to-Let have improved with lower mortgage rates and strong rental growth. The returns from cash and bonds are not as attractive as they were six months ago. As the Bank of England has highlighted, Interest Coverage Ratios (ICRs) on new lending were much lower. In a high rate environment choosing the right investment is more important than ever. Lower ICRs probably create an incentive for more landlords to incorporate."

The prospect of a general election in 2024 also has the potential to shape the coming year.

"While a change in government may not make much difference to macroeconomic policy, housing is one area of potential divergence. At face value, Labour has more ambitious building plans . It is not clear the construction industry has sufficient capacity. More immediately, will Labour bring back more stringent requirements for landlords to upgrade the energy efficiency of their properties?"

Given that Labour have indicated they could be in favour of minimum EPC requirements in the wake of their scrapping by Rishi Sunak in October last year, there is a possibility that this will once again affect BTL landlords in 2024. Keith continues;

"With 2023 a lost year in terms of activity there is plenty of pent-up demand for First Time Buyers. If affordability arithmetic can be made to work, this could be a key growth area as marginal BTL landlords sell property to younger buyers that don't mind a project."

Given that FTBs could save themselves as much as £21k by opting for a "fixer-upper", ex-rental properties might seem an appealing route to the property ladder.

House Price Stability could help create certainty amid a higher cost of living

Keith's view is that some of the headlines last year around inflation were perhaps a little overblown, looking back.

"Some of the pessimism on inflation is probably overdone. Especially in those projections from the Bank of England,. Big falls in domestic energy bills in April could see inflation back at target very soon! Obviously the price level is much higher than two years ago, and affordability will be a key conversation. In the higher rate environment, lenders are trying to get a better view of the customer's outgoings to help with decision making."

He believes that a period of stability in house prices, and realism from sellers, which does seem to be growing, would help drive these conversations in 2024.

Less uncertainty=optimism for 2024

Whilst there was a pessimistic outlook this time last year, Keith feels like a bullet was dodged in 2023.

"Heading into the 2023, inflation was 10.5% and little relief was in sight. Quoted mortgage rates peaked around 6% in the Autumn. That feels like a recipe for chaos in the housing market. Approvals of mortgages for house purchase in 2023 were down over 20% on 2022. Prices fell 4%. It could have been so much worse."

In his view, affordability will likely continue to constrain activity in 2024. But some green shoots are emerging. Surveyors are less gloomy about both supply and demand, meaning there is less market uncertainty than there was just a few months ago. 

This is all feeding a sense of careful optimism for the coming year. What can we take from the past 12 months and the year ahead is that within an uncertain mortgage market, broker guidance is essential. More stability will present more opportunities for people to progress on the property ladder and we're continuing to work with brokers in 2024 to help their clients secure the right mortgage for them.

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